Research Paper on Demand for Oil in The United States

Introduction

The microeconomics theory refers to the financial decisions made by individuals and firms. Various types of microeconomics theories are pre-classical, classical, and neo-classical. The neo-classical microeconomics theory primarily deals with the idea of free markets and the concept and assumption that people seek to maximize utility. Microeconomics covers several areas, which include opportunity cost, cost, theories of production, game theory, demand, supply, and equilibrium, among other concepts. The primary goal of this paper is to write a research essay detailing the demand for oil in the United States to demonstrate the application of microeconomics theory.

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Literature Review

According to Jadidzadeh and Serletis (2017), the United States accounted for about 98% of the growth of global oil in production alone. Baumeister and Kilian (2016), in their article, describe the production and consumption of oil and associated products in the United States and in the world. Bernanke (2016) explains that currently, the global demand for oil has grown by approximately 3.1 million barrels per day, and the rate continues to increase every day. According to Shahbaz, Gozgor, and Hammoudeh (2019), the United States remains the top global consumer of oil with an average demand of about 20.5 million barrels per day as of 2018, which is an increase of about 2.18 million barrels per day from 2017. Shahbaz, Gozgor, and Hammoudeh (2019) explain that as of 2019, most of the imported oil into the United States comes from Saudi Arabia, Mexico, Columbia, Canada, and Venezuela. Only a small percentage of the crude oil imported in the United States is consumed directly. Most of the crude oil internally produced or imported is refined into petroleum products like jet fuel, engine oil, diesel, and other products, after which it is consumed. Jadidzadeh and Serletis (2017) explain that since 2014, natural gas and petroleum have been the two leading energy sources in the United States, and together, they account for approximately 63% of the total energy consumed in the country. In their article, Shahbaz, Gozgor, and Hammoudeh (2019) say that the oil and gas industry in the United States has created more than nine million jobs for the U.S citizens, thus making up about 7% the country's overall gross domestic product

Methods

A research was done to investigate the demand for oil in the United States. A quantitative data collection procedure was used whereby participants were interviewed, and questionnaires were given. Participants were randomly selected from some of the major oil companies in the United States. The primary purpose of the interviews and questionnaires was to provide data regarding microeconomics in the oil sector in the United States and get information regarding the factors that influence the supply and demand of the commodities. Six managers from firms directly involved with the production and consumption of oil were selected and interviewed while being recorded. The interviews were conducted in a serene environment without disturbance to ensure that interviews were comfortable in the selected setting. The questionnaires contained both closed and open-ended questions. However, close-ended questions were the primary focus since they would give more comprehensive results after data analysis.

Results

The results of the interviews and questionnaires indicated that the United States is one of the leading oil consumers in the world, and the demand for oil increased every day. According to the interviews, the United States produces its oil but imports a considerable amount from states like Saudi Arabia, Mexico, and Columbia. The questions regarding the factors that affect the supply and demand of oil in the United States were the primary focus. All the interviews gave similar answers like political and environmental factors, exchange rates, increased demand, and oil reserves, among others. Other factors that were mentioned included labor, wages, government policies, international finances and regulations, and effects of trade.

Discussion

The supply and demand for oil in the United States are affected by various factors. Oil supplies are critical to the U.S economy, and therefore fluctuation of prices tremendously affects the country's economy. The prices of oil are directly proportional to the supply and demand for the commodity. One of the factors that affect the supply and demand of oil in the U.S is the increased consumption of the commodity. Statistics from the Energy Information Administration, more than 20.5 million barrels of oil are consumed every day (Jadidzadeh & Serletis, 2017). Oil reserves play a significant role in demand and supply of oil, and the price of the commodity is significantly affected. The United States exports oil to over 180 countries with an approximate of 7.5 million barrels every day. The supply of oil is affected by the capacity of the reserves.

Oil demand in the U.S is also affected by opportunity cost. In economics, opportunity cost is defined as the value of the bygone. There are several oil reserves in the United States to assist when there is increased demand or when there are shortfalls in supply. In some instances, firms are forced to hold their crude oil out of the market and store it in reserves (Jadidzadeh & Serletis, 2017). In this case, the opportunity cost is the value of the oil that could have been sold to another firm instead of being stored in reserves. Holding oil in reserves is an effective strategy since it protects the long-term supply of oil for those firms. Selling the oil immediately guarantees huge profits in the short-term, but no long-term security is provided (Bernanke, 2016). Oil prices in the United States are very high, and the market is tight in the short-term. The U.S, therefore, spares enough capacity to compensate for supply shortfalls.

International finance plays a significant role in the demand for oil in the United States. In economics, international finance refers to the monetary interactions that occur between countries, including currency exchange rates. These world exchange rates directly affect oil prices in the U.S and how the cost is reflected in global markets. For instance, when the value of the dollar increases, the impact on oil prices is significant. An increase in the prices of oil means that American firms must pay more dollars when purchasing oil since the value of the currency is reduced (Jadidzadeh & Serletis, 2017). However, when the dollar appreciates, oil prices reduce or could be canceled out by a more valuable monetary form. There has always been a relationship between the prices of crude oil in the United States and the value of the dollar since the 1980s. The increased oil prices in the U.S in the last few decades have been attributed to the decline of the dollar value and the low U.S exchange rates. The demand and supply of oil directly affect the dollar value and exchange rates too.

The U.S government directly affects the demand and production of oil in the state. One of the significant political reasons that affect the demand for oil is international relations. Since the United States is one of the leading importers of oil, the country must ensure that it maintains good relations with the provider. However, oil demand in the United States has been affected in the past, for the state has not been in good terms with some of the world's largest oil producers. For instance, in 2010, Venezuela threatened to cut off its oil sales to the United States over some political disputes (Baumeister & Kilian, 2016). Secondly, political instability also affects oil demand and production since prices escalate, and the general supplies are affected. For example, Iraq is a major oil producer in the world and exports its oil to the United States, but the country is very unstable politically. The growing instability often affects oil reserves in the country, and it poses a risk since the industry can collapse (Bernanke, 2016). Therefore, importing oil from such countries into the United States is a challenge, and it affects the general economy of the state.

Conclusion

In conclusion, the primary goal of this paper is to write a research essay detailing the demand for oil in the United States to demonstrate the application of the microeconomics theory. Microeconomics covers several areas, which include opportunity cost, cost, and theories of production, game theory, demand, supply, and equilibrium, among other concepts. According to Jadidzadeh and Serletis (2017), the United States accounted for about 98% of the growth of global oil in production alone. A research was done to investigate the demand for oil in the United States. A quantitative data collection procedure was used whereby participants were interviewed, and questionnaires were given. The results of the interviews and questionnaires indicated that the United States is one of the leading oil consumers in the world, and the demand for oil increased every day. Oil demand in the U.S is also affected by opportunity cost. International finance plays a significant role in the demand for oil in the United States. One of the significant political reasons that affect the demand for oil is international relations.

References

Baumeister, C., & Kilian, L. (2016). Understanding the Decline in the Price of Oil since June 2014. Journal of the Association of Environmental and Resource Economists, 3(1), 131-158.

Bernanke, B. (2016). The relationship between stocks and oil prices. Ben Bernanke's Blog on Brookings posted on February, 19(2016).

Jadidzadeh, A., & Serletis, A. (2017). How does the US natural gas market react to demand and supply shocks in the crude oil market? Energy Economics, 63, 66-74.

Shahbaz, M., Gozgor, G., & Hammoudeh, S. (2019). Human capital and export diversification as new determinants of energy demand in the United States. Energy Economics, 78, 335-349.